Taxation of Compensation

We previously covered the tax tribunal case of Moorthy v HMRC. In brief the facts are:

  • Mr Moorthy was made redundant and received £10,000.00
  • He then bought unfair dismissal and discrimination claims of which resulted in a settlement worth £200,000.00
  • Having already received £10k tax free, only £20k of the award was treated as being tax free
  • The tax tribunal held that only £20k of the award should be treated as tax free as it was unclear whether the award was for injury to feeling following discrimination or compensation for dismissal

The case has since been appealed to the Court of Appeal and the CoA have allowed the appeal. They held that £30k of the award had been agreed as injury to feeling and shouldn’t be taxed. However, this case is something of a dead rubber given the tax rules changed to remove injury to feeling’s tax free status at the start of April.